Report No: AUS0000591 Lao Peoples’s Democratic Republic Public Expenditure and Financial Accountability (PEFA) Assessment 2018 March 2019 . © 2019 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2019. Lao PDR Public Expenditure and Financial Accountability Assessment.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 1, 2019) Currency Unit = Lao Kip (LAK) US$1.00 = LAK 8,530 FISCAL YEAR October 1–September 30 (until 2015/2016) January 1–December 31 (since 2017) This report was prepared by Sylvie Zaitra, Consultant; John Short, Consultant; Viengmala Phomsengsavanh, Consultant; Maxwell Dapaah, Senior Governance Specialist (Financial Management); Fanny Weiner, Senior Governance Specialist (Public Sector); and Saysanith Vongviengkham, Governance Specialist (Public Sector) in cooperation with the Ministry of Finance of Lao PDR. The work was funded by the European Union. Table of Contents Executive summary ............................................................................................................................ 1 1. Introduction ................................................................................................................................... 7 2. Country background information .................................................................................................. 15 3. Assessment of PFM performance .................................................................................................. 31 PILLAR ONE: Budget reliability ............................................................................................................... 31 PI-1. Aggregate expenditure outturn ............................................................................................. 31 PI-2. Expenditure composition outturn ......................................................................................... 31 PI-3. Revenue outturn .................................................................................................................... 34 PILLAR TWO: Transparency of public finances ...................................................................................... 36 PI-4. Budget classification .............................................................................................................. 36 PI-5. Budget documentation .......................................................................................................... 38 PI-6. Central government operations outside financial reports .................................................... 41 PI-7. Transfers to subnational governments .................................................................................. 44 PI-8. Performance information for service delivery ...................................................................... 46 PI-9. Public access to fiscal information......................................................................................... 49 PILLAR THREE: Management of assets and liabilities ............................................................................ 52 PI-10. Fiscal risk reporting .............................................................................................................. 52 PI-11. Public investment management .......................................................................................... 53 PI-12. Public asset management .................................................................................................... 59 PI-13. Debt management ............................................................................................................... 61 PILLAR FOUR: Policy-based fiscal strategy and budgeting..................................................................... 65 PI-14. Macroeconomic and fiscal forecasting ................................................................................ 65 PI-15. Fiscal strategy ...................................................................................................................... 67 PI-16. Medium-term perspective in expenditure budgeting ......................................................... 69 PI-17. Budget preparation process ................................................................................................ 71 PI-18. Legislative scrutiny of budgets ............................................................................................ 76 PILLAR FIVE: Predictability and control in budget execution ................................................................ 79 PI-19. Revenue administration ...................................................................................................... 79 PI-20. Accounting for revenue ....................................................................................................... 86 PI-21. Predictability of in-year resource allocation........................................................................ 89 PI-22. Expenditure arrears ............................................................................................................. 93 PI-23. Payroll controls .................................................................................................................... 95 PI-24. Procurement Management ................................................................................................. 99 PI-25. Internal controls on non-salary expenditure ..................................................................... 103 PI-26. Internal audit ..................................................................................................................... 106 PILLAR SIX: Accounting and reporting ................................................................................................. 109 PI-27. Financial data integrity ...................................................................................................... 109 PI-28. In-year budget reports ....................................................................................................... 113 PI-29. Annual financial reports .................................................................................................... 115 PILLAR SEVEN: External scrutiny and audit .......................................................................................... 119 PI-30. External audit ..................................................................................................................... 119 PI-31. Legislative scrutiny of audit reports .................................................................................. 123 4. Conclusions of the analysis of PFM systems ................................................................................ 127 5. The government’s PFM reform process ....................................................................................... 136 Annex 1: Performance indicator summary ...................................................................................... 147 Annex 2: Summary of observations on the internal control framework ........................................... 158 Annex 3. Sources............................................................................................................................ 162 Annex 4: Calculation sheets for PI-1, PI-2, and PI-3 ........................................................................... 178 Annex 5: Data on SOEs financial reporting ...................................................................................... 185 List of Acronyms ACH Automated Clearing House ADB Asian Development Bank ASEAN Association of Southeast Asian Nations ASYCUDA Automated System for Customs Data BCEL Banque pour le Commerce Exterieur Lao BoL Bank of Lao PDR CMM Committee for Macro-fiscal Monitoring COFOG Classification of the Functions of Government CPI Consumer Price Index DIC Department of International Cooperation DMFAS Debt Management and Financial Analysis System DPTA Development Plan for Tax Administration EDL Electricité du Lao EU European Union FDI Foreign Direct Investment FPLD Fiscal Policy and Law Department EPF Environmental Protection Fund ESDP Education Sector Development Plan FAIR Foreign Aid Implementation Report FITC Financial Information Technology Center FMCBP Financial Management Capacity Building Project FMIS Financial Management Information System GDP Gross Domestic Product GFIS Government